Term

Definition

Examples

Trading

Buying and selling; the holding of any position - financial or physical investment - for a period of time with the intent on preventing a loss ormaking a profit on the difference between the acquisition cost and the market price at time of sale of the asset or output from the asset. The intention defines the kind of trading: speculating, hedging, market making, etc.

See examples for speculation, hedging and market making below.

Speculation

A bet on the future direction of price movements and combines high risks with high potential rewards. It requires no more than the conviction of one’s opinion and a lot of spare money

An outright long or short position in a commodity

Hedging

A transaction which reduces the overall risk of the company as measured by Value-at-Risk calculations

Back-to-back contracts, pass-through costs, purchase of a put option to protect against fall in price of fuel inventory.

Market making

Constant willingness and ability to buy or sell a commodity at a price. This constant availability or liquidity is convenient for other market participants and can be essential to the proper functioning of many markets. The market-maker earns a thin margin (bid/offer spread) and assumes limited risk by providing liquidity to a market.

The old Enron online, the foreign exchange kiosks at airports, and the specialists on the various exchange floors.

Marketing or origination

The near-simultaneous entry into a pair of transactions - the creation of a position - either by acquiring a long position or selling a short position - and the near-immediate entering into an offsetting position that creates a profit. (This then encompasses both customer marketing and market making

The purchase or sale of power purchase agreements, full-requirements contracts, or a particular shaped (structured) product.

Arbitrage

The capture of profits by taking advantage of price differentials across locations, time or commodities. In the energy business one typically needs an asset to capture an arbitrage opportunity.

Storage facilities allow the capture of time arbitrage, transportation assets allow the capture of location arbitrage, and power plants monetize the arbitrage between the fuel and power prices.

Broking or brokering

This is not trading, but the facilitation of trading.  Revenue is based on commissions, on value and volume of transactions.

GFI, Spectron, Prebon, to name a few.